The sequester, explained
Posted by Suzy Khimm
on September 14, 2012 at 2:35 pm

The White House has released its plan explaining how the sequester’s mandatory spending cuts to defense and domestic spending will be implemented in 2013. Here’s the background on what the sequester is, how it happened and what happens from here:

What is the sequester?

It’s a package of automatic spending cuts that’s part of the Budget Control Act (BCA), which was passed in August 2011. The cuts, which are projected to total $1.2 trillion, are scheduled to begin in 2013 and end in 2021, evenly divided over the nine-year period. The cuts are also evenly split between defense spending — with spending on wars exempt — and discretionary domestic spending, which exempts most spending on entitlements like Social Security and Medicaid, as the Bipartisan Policy Center explains. The total cuts for 2013 will be $109 billion, according to the new White House report.

Under the BCA, the cuts were triggered to take effect beginning Jan. 1 if the supercommittee didn’t to agree to a $1.2 trillion deficit-reduction package by Nov. 23, 2011. The group failed to reach a deal, so the sequester was triggered.

Why does everyone hate the sequester so much?

Legislators don’t have any discretion with the across-the-board cuts: They are intended to hit all affected programs equally, though the cuts to individual areas will range from 7.6 percent to 9.6 percent (and 2 percent to Medicare providers). The indiscriminate pain is meant to pressure legislators into making a budget deal to avoid the cuts.

How would these cuts affect the country?

Since the details just came out, it’s not entirely clear yet. But many top defense officials have warned that the cuts will lead the military to be “hollowed out.” Democratic legislators have similarly warned about the impact on vital social programs. And defense, health care and other industries that are significantly dependent on federal spending say that major job losses will happen if the cuts end up taking effect.

At the same time, if legislators try to avoid the sequester without replacing it with real deficit reduction, the U.S. could face another credit downgrade.

Why did Congress and the White House agree to the sequester in the first place?

The government was approaching its debt limit, which needed to be raised through a congressional vote or else the country would default in early August 2011. While Democrats were in favor of a “clean” vote without strings attached, Republicans were demanding substantial cuts in exchange for raising the debt limit.

President Obama and congressional leaders ultimately agreed to the BCA, which would allow the debt ceiling to be raised by $2.1 trillion in exchange for the establishment of the supercommittee tied to the fall-back sequester, as the Center for Budget and Policy Priorities explains. The deal also includes mandatory spending reductions on top of the sequester by putting caps on non-entitlement discretionary spending that will reduce funding by $1 trillion by 2021.

Who supported the debt-ceiling deal?

Party leaders, the White House and most members of Congress supported the debt-ceiling deal: The BCA passed on a 268-161 vote in the House, with about one-third of House Republicans and half of House Democrats opposing it. It passed in the Senate, 74-26, with six Democratic senators and 19 Republican senators opposing it.

Can the sequester be avoided?

Yes, but only if Congress passes another budget deal that would achieve at least $1.2 trillion in deficit reduction. Both Democrats and Republicans have offered proposals to do so, but there still isn’t much progress on a deal. The political obstacles are the same as during the supercommittee negotiations: Republicans don’t want to raise taxes to generate revenue, while Democrats are reluctant to make dramatic changes to entitlement programs to achieve savings.

What happens from here?

No one on Capitol Hill thinks any deal will happen before Election Day. After Nov. 6, Congress will have just a few weeks to come up with an alternative to the sequester. The challenge is complicated by the fact that the Bush tax cuts, the payroll tax, unemployment benefits and a host of other tax breaks are all scheduled to expire Dec. 31. The cumulative impact of all of these scheduled cuts and changes is what’s popularly known as the fiscal cliff. There’s already talk of passing a short-term stopgap budget plan during the lame-duck session to buy legislators more time to come up with a grand bargain.

The fact that the failed debt ceiling negotiations were even negotiated in the first place was because the GOP made the unprecedented decision to hold the economy hostage in the summer of 2011.

did not address because you were wrong, plan and simple. The Prez/Dems forced the sequester on the pubs and included the defense cuts. The Prez scuttled the $4 Trillion deal. Spin it however you'd like, revise history any way you like but you are wrong

__________________"And if you don't know where you're going
Any road will take you there" - George Harrison

This is an overly simplistic reading of Woodward's book. Obama changed the terms of the deal and Boehner couldn't hold the GOP coalition on it, so he scuttled Obama's change.

I guess if your goal is to "read into" what Woodward ACTUALLY wrote so it fits your agenda then whatever. There is no reasoning with you because you see, hear and read what you want to see, hear and read.

__________________"And if you don't know where you're going
Any road will take you there" - George Harrison

I guess if your goal is to "read into" what Woodward ACTUALLY wrote so it fits your agenda then whatever. There is no reasoning with you because you see, hear and read what you want to see, hear and read.

Your description of Woodward's telling of the story: Obama walked away from the deal.

My description of Woodward's telling of the story: Obama and Boehner had a tentative agreement, Obama changed it at the last moment and Boehner walked away.

You tell me -- which one matches up closer to Woodward's telling of the story?

Your description of Woodward's telling of the story: Obama walked away from the deal.

My description of Woodward's telling of the story: Obama and Boehner had a tentative agreement, Obama changed it at the last moment and Boehner walked away.

You tell me -- which one matches up closer to Woodward's telling of the story?

And which one is an overly simplistic assessment of it.

Last thing I post on this before my trip to Reno today for The Who concert. This is my description: Obama did NOT walk away from a deal, he changed it with a poison pill because he didn't want a deal and knew with the poison pill that Boehner couldn't get the votes in the House thus no spending cut deal. Woodward stated that quite clearly. Swing and a miss

__________________"And if you don't know where you're going
Any road will take you there" - George Harrison

Last thing I post on this before my trip to Reno today for The Who concert. This is my description: Obama did NOT walk away from a deal, he changed it with a poison pill because he didn't want a deal and knew with the poison pill that Boehner couldn't get the votes in the House thus no spending cut deal. Woodward stated that quite clearly. Swing and a miss

You made all kinds of shit up just now.

Woodward never described any additional offers made by Obama as poison pills, nor that Obama didn't want a deal, or that he "knew" Boehner'd fail to get the votes.

Woodward never described any additional offers made by Obama as poison pills, nor that Obama didn't want a deal, or that he "knew" Boehner'd fail to get the votes.

Those are three things you just made up about what Woodward said.

o, I didn't make them up and I will quote Woodward's book next week when I return. The poison pill WAS the $400 Billion additional tax revenue that Obama included at the last minute and Woodward wrote that Obama knew Boehner couldn't get the votes for that. As for Obama not wanting the deal, I'll reread that as you may be correct that Woodward may not have stated that however why include the extra tax revenue at the last minute when you know you can't get it if you want a deal. Peace out for now

__________________"And if you don't know where you're going
Any road will take you there" - George Harrison

UNLESS lawmakers act by March 1, the budget sequestration process will start cutting government spending automatically — reductions that would amount to $1.2 trillion by 2021. Congress and the White House agreed in 2011 to the sequestration, and many people see it as a kind of political gimmick.

But I believe that it can turn out to be a very good thing — and that most of these cuts should proceed on schedule, though with some restructuring along the way.

One common argument against letting this process run its course is a Keynesian claim — namely, that cuts or slowdowns in government spending can throw an economy into recession by lowering total demand for goods and services. Nonetheless, spending cuts of the right kind can help an economy.

Half of the sequestration would apply to the military budget, an area where most cuts would probably enhance rather than damage future growth. Reducing the defense budget by about $55 billion a year, the sum at stake, would most likely mean fewer engineers and scientists inventing weaponry and more of them producing for consumers.

In the short run, lower military spending would lower gross domestic product, because the workers and resources in those areas wouldn’t be immediately re-employed. Still, that wouldn’t mean lower living standards for ordinary Americans, because most military spending does not provide us with direct private consumption.

To be sure, lower military spending might bring future problems, like an erosion of the nation’s long-term global influence. But then we are back to standard foreign policy questions about how much to spend on the military — and the Keynesian argument is effectively off the table.

On a practical note, the military cuts would have to be defined relative to a baseline, which already specifies spending increases. So the “cuts” in the sequestration would still lead to higher nominal military spending and roughly flat inflation-adjusted spending across the next 10 years. That is hardly unilateral disarmament, given that the United States accounts for about half of global military spending. And in a time when some belt-tightening will undoubtedly be required, that seems a manageable degree of restraint.

The other half of sequestration would apply to domestic discretionary spending, where the Keynesian argument against spending cuts has more force.

But here, too, much of the affected spending should be cut anyhow. Farm support programs would be a major target, and most economists agree that those payments should be abolished or pared back significantly. Regulatory agencies would also lose funds, but instead of across-the-board cuts, we could give these agencies the choice of cutting their least valuable programs — or, for that matter, we could cut farm subsidies even further.

Of course, much discretionary spending goes toward useful projects — building or repairing roads, for example, or research toward medical innovation. Limiting these investments would bring the Keynesian argument into play, and perhaps harm productivity, too. So we should look to substitute some areas for others — and turn to Keynesian macroeconomics for guidance.

THE Keynesian argument suggests that spending cuts do the least harm in economic sectors where demand is high relative to supply. Thus, the obvious candidate for the domestic economy is health care, and the sequestration would cut many Medicare reimbursement rates by 2 percent. We could go ahead with those cuts or even deepen them, because America has had significant health care cost inflation for decades.

We already have huge demand in our health care system, along with a corresponding shortage of doctors. And the coverage extension in the Affordable Care Act will add to the strain. In this setting, cutting Medicare reimbursement rates wouldn’t result in fewer health care services over all. Yes, doctors might be less keen to serve Medicare patients but might be more available for others, including the poor and the young. In the long run, the improved access for those groups would yield much return on investment, and would move the health care system closer to many of the European models.

In any case, these Medicare cuts would be unlikely to bring a macroeconomic debacle, and would ease long-term fiscal pressures. We could address the shortage of doctors by removing some barriers to entry into the profession, and, in possible new legislation for immigration, easing the way for more medical professionals to come to the United States.

Most generally, there is an issue of global investor perceptions. As the credit rating agencies have noted, some investors wonder whether spending cuts of any kind are possible in the nation’s current political environment. And even if the economic recovery is causing budget deficits to shrink, there are plenty of negative signals about our political ability to address longer-term fiscal concerns, which will become more severe as the population ages.

Simply accepting the automatic spending cuts of the sequestration, without modification, could look like more dysfunctional politics, too. Though many of the reductions have merit, others need orderly renegotiation so the resulting cuts aren’t just necessary acts of fiscal restraint, but also net pluses for the economy.

Two-fifths of the $1.5 trillion in savings from cutting and capping funding for discretionary programs comes from defense.

I'm all for more cuts to defense too, but it's only fair to note that some cuts have been made there already.

Also, why are only spending cuts mentioned when the discussion is the budget? Please don't tell me that if it's not spending cuts, i.e. if it's a tax increase, it doesn't count for budget discussions (and Keynesian economics, which is part of his discussion, does not make this distinction). Thus, note also that the American Taxpayer Relief Act (ATRA) added another half trillion in deficit reduction. Together, the $1.5 trillion in appropriations cuts, plus the $.5 trillion in tax increases in the ATRA, plus the $300 billion in interest savings amount to around a bit over $2.3 trillion in deficit reduction (see table 1 here). Once the economy can handle it, we need a bit more (though not everyone agrees) to stabilize the long-run picture, but to say we've made no progress at all is wrong and misleads about the urgency of finding further cuts. If people want more spending cuts, fine, we can debate that along with a debate over tax increases, and maybe even agree on cuts to defense and a few other areas. But in making the argument for an ideological position that government ought to be smaller, don't present the case as though nothing at all has been done to cut spending (and please don't hide the ideological call for a smaller government in a discussion about reducing debt). I was going to say that misleading people about the cuts we've made so far -- asking whether we'll ever be able to cut spending when we already have -- is no way to win an argument, but actually it is, and that's the problem.

If the R's don't want to close all the corporate welfare loopholes like
$4billion to oil companies,
farm subsidy's to big corporate farms to not grow anything,
end tax breaks to companies that ship jobs overseas,
no taxes on American companies running casinos in Asia etc. .......... then let the sequester happen.

Your understanding of tax issues leaves a lot to be desired. For example, there is no tax break for companies that ship jobs overseas. What you're arguing for is a tax penalty for companies that ship jobs overseas.

__________________

“The American people are tired of liars and people who pretend to be something they’re not.” - Hillary Clinton

President Barack Obama will call for a short-term fix Tuesday afternoon to avert across-the-board spending cuts, and he wants new revenue to be part of the deal, according to a White House official.

Obama scheduled a 1:15 p.m. announcement to ask Congress to act to avoid the “deep, indiscriminate cuts to domestic and defense programs” slated to take effect slated to begin taking effect under sequester starting March 1.

“Uncertainty around the sequester is already having a negative impact on our economic growth, and if it was to take effect it would cost hundreds of thousands of American jobs and have devastating impacts on our economy,” the official said.

To give negotiators time to pass a broader deficit and budget package, the official said the president is asking for “a smaller package of spending cuts and tax reforms to avoid the economically harmful consequences of the sequester for a few months. ... While we need to deal with our deficits over the long term, we shouldn’t have workers being laid off, kids kicked off Head Start, and food safety inspections cut while Congress completes the process.”

The sequester, included in the August 2011 deficit reduction agreement between the White House and Congress, would cut some $85 billion from federal programs during the current fiscal year. It is set to begin taking effect March 1.

About $43 billion in those reductions would come in Pentagon spending, and $26 billion would come from nondefense discretionary programs.

The White House last week blamed a 0.1 percent decline in the gross domestic product in the fourth quarter — an unexpected decline led in part by falling federal spending — in part on uncertainty over the sequester.

Obama will also emphasize that while the economy is poised to strengthen this year, “we can’t see another self-inflicted wound from Washington,” the official said.

Speaker John A. Boehner, R-Ohio, earlier Tuesday noted the House in the previous Congress passed plans to replace the sequester. “It’s time for the Senate Democrats to do their work. It’s time for the president to offer his ideas for how to replace the sequester.”

The Senate did not take up the bills the House passed last year, with Democrats saying the proposals were aimed at loading cuts onto domestic discretionary spending while sparing defense spending and avoiding tax revenue to replace any of the reductions.

In a statement, Boehner blamed the sequester on Obama, saying that he “insisted it become law.” And he was cool to the idea of more revenue.

“We believe there is a better way to reduce the deficit, but Americans do not support sacrificing real spending cuts for more tax hikes,” he said. “The president’s sequester should be replaced with spending cuts and reforms that will start us on the path to balancing the budget in 10 years.”

The White House said Obama offered balanced plans to do so in his December negotiations with Boehner. And Press Secretary Jay Carney has said the White House’s December “grand bargain” offer remains on the table.

A scary graph from Goldman Sachs
Posted by Ezra Klein
on February 5, 2013 at 11:18 am

“On Friday,” writes Alec Phillips, an economist at Goldman Sachs, “we lowered our outlook for federal spending, to take into account the increased likelihood that cuts under sequestration take effect.”

With that built into their baseline, the cuts to federal consumption and investment look deep in the coming years. Here’s their graph, which adds a bit of historical perspective:

“Sequestration, spending caps, and reduced war spending will together reduce real federal consumption and gross investment by 11% over the next two years,” writes Phillips. Ouch. That’s a very big drop in a very weak economy.

“This is a large decline in historical context, but it is not without precedent,” Phillips continues. “This would mark the third decline in the last 50 years; the first occurred around 1970, after Vietnam War spending had peaked, followed by another around 1990 as military spending declined following the end of the Cold War and multiple rounds of spending caps were enacted.”

Even if there’s precedent for this kind of a drop, there are at least three reasons to be particularly concerned about it happening now. First, the previous periods of austerity that Phillips mentions were primarily driven by the end of major wars. That meant that a lot of that spending was not directly raising living standards in the United States, and so its absence didn’t have the kinds of consequences of, say, the sequester. Second, this graph misses the significant tax-side austerity we’re engaged in, with the expiration of the payroll tax cut and the high-income tax increases from the fiscal cliff deal serving as an additional drag on growth. And third, the economy remains unusually weak by historical standards, and this kind of fiscal drag is going to make it that much harder to recover.

Something to remember about the sequester is that part of the reason it was never supposed to happen is that it’s not backloaded. That is to say, where most deficit-reduction proposals have been structured to deliver their heavier cuts in years five-10, when the economy is further along in its recovery, the sequester’s cuts in year one are of the same magnitude as the cuts in year 10. That is to say, from the perspective of the recovery, it’s a particularly nasty and dumb approach to cutting spending.

President Barack Obama will call for a short-term fix Tuesday afternoon to avert across-the-board spending cuts, and he wants new revenue to be part of the deal, according to a White House official.

Obama scheduled a 1:15 p.m. announcement to ask Congress to act to avoid the “deep, indiscriminate cuts to domestic and defense programs” slated to take effect slated to begin taking effect under sequester starting March 1.

“Uncertainty around the sequester is already having a negative impact on our economic growth, and if it was to take effect it would cost hundreds of thousands of American jobs and have devastating impacts on our economy,” the official said.

To give negotiators time to pass a broader deficit and budget package, the official said the president is asking for “a smaller package of spending cuts and tax reforms to avoid the economically harmful consequences of the sequester for a few months. ... While we need to deal with our deficits over the long term, we shouldn’t have workers being laid off, kids kicked off Head Start, and food safety inspections cut while Congress completes the process.”

The sequester, included in the August 2011 deficit reduction agreement between the White House and Congress, would cut some $85 billion from federal programs during the current fiscal year. It is set to begin taking effect March 1.

About $43 billion in those reductions would come in Pentagon spending, and $26 billion would come from nondefense discretionary programs.

The White House last week blamed a 0.1 percent decline in the gross domestic product in the fourth quarter — an unexpected decline led in part by falling federal spending — in part on uncertainty over the sequester.

Obama will also emphasize that while the economy is poised to strengthen this year, “we can’t see another self-inflicted wound from Washington,” the official said.

Speaker John A. Boehner, R-Ohio, earlier Tuesday noted the House in the previous Congress passed plans to replace the sequester. “It’s time for the Senate Democrats to do their work. It’s time for the president to offer his ideas for how to replace the sequester.”

The Senate did not take up the bills the House passed last year, with Democrats saying the proposals were aimed at loading cuts onto domestic discretionary spending while sparing defense spending and avoiding tax revenue to replace any of the reductions.

In a statement, Boehner blamed the sequester on Obama, saying that he “insisted it become law.” And he was cool to the idea of more revenue.

“We believe there is a better way to reduce the deficit, but Americans do not support sacrificing real spending cuts for more tax hikes,” he said. “The president’s sequester should be replaced with spending cuts and reforms that will start us on the path to balancing the budget in 10 years.”

The White House said Obama offered balanced plans to do so in his December negotiations with Boehner. And Press Secretary Jay Carney has said the White House’s December “grand bargain” offer remains on the table.

The guy has an insatiable desire for more taxes.

He got his revenue. Now it's time for the "cuts" part of the balanced approach.

__________________

“The American people are tired of liars and people who pretend to be something they’re not.” - Hillary Clinton